DBS, Danamon Investors Digest Collapsed Deal

The morning after surely looks different for investors in Singapore’s DBS Group Holdings Ltd. and those in Indonesia’s PT Bank Danamon.

DBS on Wednesday said it had ended its long-running attempt to take a controlling stake in Bank Danamon, Indonesia’s sixth-largest bank, in a deal that would have been worth about US$7 billion. It said it wouldn’t take a minority stake already approved by Indonesia’s central bank.

Good move, said Barclays. While a minority stake wouldn’t give DBS full control, “punitive” Basel III capital rules that raise costs for banks holding minority stakes would result in “capital inefficiency” for DBS, it said in a note. Removing the overhang could mean a higher share price and bigger dividends, it added.

The market appeared to agree. Shares in DBS, which announced a 10% increase in net profit in the second quarter on Thursday morning, are up 2.6% in Singapore.

Things looked a bit different over in Jakarta, where shares in Bank Danamon plunged 13%.

“With DBS dropping the deal, Bank Danamon’s valuation now essentially reverts to fundamentals and we believe Bank Danamon’s operating fundamentals are deteriorating,” brokerage RHB OSK Indonesia said in a note.

The acquisition of Bank Danamon would have furthered DBS’s goal of becoming a leading Asian bank with a more diversified revenue mix across markets. But Indonesia’s central bank last year capped initial stakes in domestic lenders at 40%. It approved DBS’s acquisition of a 40% stake in May this year, but said any further investment depended on Singapore showing “reciprocity” by allowing Indonesia’s banks to open more branches there.

The deal’s collapse may have broader implications for Indonesia’s banking sector by deterring foreign interest, even though the cap on initial stakes is high by regional standards, Fitch Ratings said in a note. “Foreign capital is necessary for the market to fulfill its potential” and “can also bring better risk, transparency and governance discipline to the banking sector,” Fitch said.

Of course, other would-be investors have taken notice. Dutch lender Rabobank in June abandoned plans to sell its Indonesian subsidiary, Rabobank Indonesia. Prospective buyers were put off by the new cap on stakes, according to people familiar with the matter.